Alan Yan is CEO of AdChina, an online advertising platform company in China.

Yan discussed his company and the Chinese online advertising market with AdExchanger.

AdExchanger.com: What are some of the challenges with the Chinese market when it comes to online advertising?

AY: There are several major challenges.

First, the pricing model - the majority is still CPD or cost per day. People also call it CPT, cost per time. Basically, you buy ad impressions on a time basis so it's similar to the sponsorship pricing model you find in the US. Though CPM is often used for brand advertising elsewhere, it is still not in the mainstream here.

When we started our business back in 2007, [media on a CPM basis] was rarely sold. Today, it's about probably 15 to 20 percent of the entire brand advertising spend in the Chinese market. So there's a lot, but it is small compared to CPT. That's one challenge.

Also, because of CPT, you basically don't have any room to optimize your campaign’s performance. You just place the ad and then wait until the end. So we believe that CPT, or CPD now, the time‑based pricing model is not the right thing, obviously. I personally believe in brand advertising’s CPM model. For performance, CPA.

Why did the CPT and CPD models make sense originally?

If you think about the Chinese advertising industry, the whole advertising sector just started back in the late `80s. And when the Internet and its advertising opportunity emerged in the late `90s, the first online advertising campaigns happened in China. Not many people had the expertise in advertising and advertisers here tended to only want to see their ads - that’s what made them feel comfortable.

What other challenges are there in the Chinese online ad market?

Another challenge is a consequence of the CPT (cost per time) model. Under the CPT model, each website is selling their ad inventory on their own. There is no way that you can use technology to break down the barrier between websites as there's no linkage or tracking among all the sites - which means a lot of wasted money because one online visitor browsed three different websites, for example. Then the advertiser gets the report from all the websites separately and adds it together. It’s a number for audience reached and impressions delivered, which is far from the true picture. There's no integrated view of your campaign.

This overlap of impressions of all the audience the marketer reaches is due to a lack of technology.

Most Chinese companies and Chinese Internet companies, for that matter, do not want to spend resources on technology since many of them don't value advertising technology as something that can create a value for them. Under a CPT model, you don't have to have technology other than a basic ad inventory management system.

When we started our business, it was a huge headache for us. Over the years, we have been working with all the major players like Nielsen and DoubleClick; unfortunately, all of them are small here in China. Their online business here is weak. Measurement is something still missing. There's a great opportunity for a company to create a credible business [around] online advertising measurement.

So, how do you put this: what is the problem that AdChina solves?

AdChina offers solutions to the Chinese advertising sector by introducing transparency, liquidity, and high and measurable ROI, to the advertisers in this space. Of course, by doing so we help the publishers better monetize their ad inventories and their audiences.

AdChina services both the buy and the sell side with its tech. Why?

We thought that there were huge liquidity issues on both the supply and demand side. On the supply side, there are probably two to three million Chinese publishers today. But, as I mentioned earlier, they are doing advertising on their own. There’s no integration between these publishers. Also, there are four big publishers in China. On average, with each of them - nearly 40 percent to 60 percent of their impressions are wasted through a CPD (cost per day) model. A consequence of the CPD model is that advertisers want to buy ad inventory from the sites with the higher traffic. Yet, for [internal] content pages, the traffic is not treated the same because traffic is much lower than the channel home pages or the home page for the site. So people end up buying just the [home page] space.

Also, on the supply side, big sites hire a big salesforce but for the smaller sites, they can't do the same. So all of those companies come together create a challenge for the supply side - how do they create a marketplace which could solve the liquidity issue?

On the demand side, advertisers want an integrated approach. They want all of their campaigns measurable. They want to look at ROI.

So are you saying you need to provide everything, ad tech-wise, in order to provide an effective opportunity for audience buying?

I don't think we provide everything. Obviously, we provide key elements across the value chain. For example, definitely on the supply side with our SSP. It consists of three major pieces - content measurement, ad measurement and data measurement. We work with DoubleClick and a local Chinese firm called iResearch as well as some others. We are the third-party checking players in the market.

How is the agency world transpiring in China today?

Most of these aren't local Chinese agencies. They're international agencies located in the big cities and for the big advertisers. But for regional advertisers and businesses, most of them are still with the local Chinese agencies. So in Beijing, Shanghai, Guangzhou or Shijiazhuang, you will find that most of the big brands or spenders are actually with the global agencies like WPP. And there are some others.

Specifically on advertising, there are two sets of agencies here. One is the purely online agencies, like years ago in the US, you had Digitas and Razorfish. Now. you have WPP Group and some others. They have an integrated approach and do offline and online.

With the international agencies, all of them didn't have a digital arm until 2008. Before 2008, none of the major international agencies had built their internal, digital advertising business here in China. Most of them just outsourced that business to local agencies. Or they tried to find a strategic partner with the local agencies. Then, starting in 2008, those international agencies started developing and building their internal capabilities in online advertising. It's still new for the major agency players in developing digital advertising business today in China.

What is your competitive set?

We were the first to move into the market. One thing, which is always true in the Chinese market, is that if you can do a good thing, there will be copycats that quickly emerge in the market. If you can get money - there's a lot of money here - people can just copy your model. Fortunately, today, AdChina is at least one and a half to two years ahead of the competition.

According to a leading local research firm, iResearch, we own probably nearly 50 percent marketshare. From '07 to ’08, we built a model and got our first round of financing in April '08. As you know, 6 months later, the financial crisis came. At that point in time, there were some companies that planned to copy our model. But, thanks to the crisis, not many people could get funding. We are now growing very fast and the financial crisis actually provided us a good opportunity by creating a barrier for new entrants.

Why take money from a US firm like Norwest Venture Partners? Why not ask for money from a Chinese firm, because, as you say, there's plenty of money in China?

The major reason is that when you use money, you look at the value behind the money. For us, there is a lot of innovation happening here in digital advertising in China, including AdChina. But there are a lot of things in the US that we can learn from. I used to spend quite a lot of time studying the US and advertising’s evolution over the past decade. That's why I got to know David Rosenblatt (former CEO of DoubleClick) and Mike Galgon (co-Founder of Aquantive), who are now on the advisory board of our company. To learn from the US, its lessons or its practices, is something that investors can help with. And that's the major reason.

Back to advertising in China - is every campaign you do in China targeting Chinese users? Does it target other users outside of the country?

I would say 100% of the campaigns we run actually target the Chinese users. Sometimes it’s Taiwan and Hong Kong, but it still goes into China. There has been no requet to target overseas yet.

Can you talk a bit about some milestones within the next 12 months that you'd like AdChina to achieve?

First of all, we want to launch a real-time capability.Secondly, we launched an initiative called TV Across the Internet, which is a platform that we developed with Nielsen to enable large advertisers to switch their advertising spending from TV commercials to mainly online video. The third milestone is mobile. We launched our mobile platform last year when mobile ads accounted for 5% percent of our revenue. In 2012, we hope we can do somewhere around 10%.